China Builders Plunge in Hong Kong on Trust Financing Report

Deprived of bank loans by government policies, developers pay between 16 percent and 25 percent to borrow from trusts, an official at Beijing-based National Trust, who asked not to be identified as he isn’t authorized to speak to the media, said in May. Photographer: Qilai Shen/Bloomberg

Greentown, the largest builder in the eastern province of
Zhejiang, slumped 16 percent to HK$4.49 at the close of trading
in Hong Kong, the most in almost three years. The developer said
it hasn’t received the regulator’s notice. KWG Property Holding
Ltd. tumbled 12 percent, while five of the 10 biggest decliners
on the MSCI China Index were property companies.

The China Banking Regulatory Commission ordered trust
companies to assess their risks associated with Greentown’s
parent and its units, Reuters reported, citing unidentified
people. Developers have turned to trust companies for financing
as the regulator restricted bank lending for real estate to cool
prices and avert a property bubble.

A gauge of property stocks on the Shanghai Composite Index
declined the most among industry groups, dropping 4.2 percent.

No Notice

Greentown said in a statement to the Hong Kong exchange it
hasn’t received a notice from the banking regulator and there is
no investigation into the group. Two phone calls to the CBRC’s
news department weren’t answered.

The report may be a sign that China is trying to restrict
financing sources for developers, Du said in a note today.
China’s developers may pay interest of as much as 25 percent to
borrow from private trust companies to skirt tighter rules.

“Investors are worried that the regulator will further
tighten developers’ financing through trust funds,” said
Johnson Hu, a Hong Kong-based property analyst of CIMB-GK
Securities Research. “Financing through trusts accounts for
quite a big pie of developers’ total financing, especially for
those non-listed small and mid-sized developers.”

Deprived of bank loans by government policies, developers
pay between 16 percent and 25 percent to borrow from trusts, an
official at Beijing-based National Trust, who asked not to be
identified as he isn’t authorized to speak to the media, said in
May.

The yield on Hopson’s $300 million of 11.75 percent notes
due January 2016 was at a record 21.4 percent today, according
to Royal Bank of Scotland Group Plc prices on Bloomberg. The
extra yield investors demand to hold the bonds over U.S.
Treasuries rose 2 basis points to 2,077 basis points, also a
record high, RBS and Bloomberg pricing data show.

The yield on Guangzhou, southern China-based Evergrande
Real Estate Group Ltd.’s $1.35 billion of 13 percent notes due
in January 2015 rose 252 basis points to a record high of 21.328
percent today, RBS prices show. The shares fell 11 percent, the
most since November 2009.

‘Not Surprised’

Greentown, based in the eastern city of Hangzhou, mainly
develops high-end homes in 39 Chinese cities. The company cut
its presales target by 20 percent to 40 billion yuan ($6.3
billion) because of its developments in cities with limits on
property purchases, Jefferies International Ltd. said in an Aug.
29 report.

The developer told analysts in a briefing at the time that
banks had stopped their trust financing in the first half and
the company will switch to private equity or real estate funds
in the second half, Jack Gong, an analyst at Jefferies, said in
an interview today.

“We were not surprised because this was in line with
government orders,” said Hong Kong-based Gong. “The market
just tends to overreact on negative news.”

Chinese regulators told banks to tighten lending for real
estate on concern credit risks will increase as the impact of
government curbs deepens, a person familiar with the matter said
last month. Lenders were told not to extend the maturity of
loans to developers, not to grant new credit to help repay
maturing debt, and to set higher standards on loans for
commercial properties than residential, the person said.

‘Very Weak’

The government said in July that it will rein in
residential prices in smaller cities after it raised down-payment requirements and mortgage rates earlier this year. China
also increased major lenders’ reserve-requirement ratios by 0.5
percentage point to a record 21.5 percent starting June 20 and
raised interest rates five times since September.

Almost 70 percent of developers said their cash-flow
conditions in August worsened from July, independent investment-advisory firm CEBM Group Ltd. said in an Aug. 5 report, citing a
monthly survey of real-estate companies in 12 Chinese cities.
That was an increase from 22 percent in July.

The curbs will make smaller developers “very weak,” said
Nicole Wong, a Hong Kong-based analyst at CLSA Asia-Pacific
Markets. “The industry will go into a consolidation stage and
players with big brand names will get stronger.”

Home Prices

China’s new-home prices rose in August from a year earlier
in all 70 cities monitored by policy makers, according to
figures released by the statistics bureau on Sept. 18. Of the
cities, 16 posted declines from July, and another 31 were
unchanged in August from the previous month, the data showed.
That’s the first time fewer than half of the cities surveyed
posted month-on-month gains, according to Samsung Securities.

Deutsche Bank AG checked the trust loan financing of 17
developers, including Renhe and Agile, and “the overall
exposure is not significant,” analyst Tony Tsang said in an e-mailed note to clients today.

“We believe the investigation on Greentown is an
independent incident that should not be applied to others in the
industry,” Tsang said.